Why Dish Should Not Sell Its Spectrum To Verizon

According to some media reports, Verizon is interested in buying Dish Network‘s wireless spectrum. Dish has been amassing spectrum over the past few years and has ambitions to enter the wireless arena. The U.S. pay-TV market is saturated and Dish sees wireless as its next growth driver. It controls 40 MHz on the AWS-4 band and 10 MHz of the 1900 MHz PCS H Block. We estimate that the pre-tax value of Dish’s AWS-4 spectrum is close to $21 billion; so, should Dish sell its valuable spectrum? While selling the spectrum will boost Dish’s cash on hand, it will leave the satellite company with only its U.S. pay-TV business in a saturated market, and uncertainty regarding what its growth engine would be. We continue to believe that Dish should either build its own infrastructure or partner with an existing carrier to provide wireless and bundled pay-TV services. As far as Verizon is concerned, it makes sense for the company to acquire more spectrum for better data services in urban areas. Neither Dish nor Verizon has confirmed the report so far. However, it is an interesting development, and we are eager to see how the events unfold.

We estimate Dish’s spectrum value at $1.73 per MHz-POP. The January 2014 deal between T-Mobile and Verizon for the transfer of some AWS and PCS spectrum licenses can be used as an indicator for the current value of such spectrum licenses. We applied a similar price per MHz-POP to Dish’s spectrum to arrive at its estimated spectrum value. The total population figure for the spectrum coverage that T-Mobile sold to Verizon was 55 million, with 10 MHz of spectrum and a price paid of $950 million. This translates to a price of $1.73 per MHzPop. We then applied the same price per MHzPop to Dish’s spectrum to arrive at its spectrum value.

While the deal between T-Mobile and Verizon was for two different bands of spectrum – 700 MHz and AWS PCS spectrum – the 700 MHz valuation is not applicable to Dish as its airwaves are of higher frequency (AWS-4). Therefore the value of AWS and PCS spectrum that was sold by T-Mobile makes more sense for Dish’s spectrum. It should also be noted that there is a significant difference for the value of downlink spectrum as opposed to uplink. Dish currently has 50 MHz of downlink spectrum, which is closer to what Verizon holds, and Verizon has more than 100 million customers on that spectrum. Additionally, Dish’s AWS-4 spectrum’s physical characteristics make it well-suited for LTE. Accordingly, we believe that it could fetch a similar price per MHz-POP to the aforementioned deal should it be sold.

Why Dish Shouldn’t Be Selling

Verizon’s management has stated that it isn’t interested in buying a satellite company. However, buying the spectrum from Dish could be a good move. There will be an auction for 600 MHz spectrum next year but the guidelines for that auction make it difficult for larger players to acquire more spectrum. For instance, the FCCFCC will withhold around 30 MHz of spectrum for smaller players. It thus makes sense for Verizon to acquire Dish’s spectrum and avoid the FCC auction next year.

As far as Dish is concerned, the spectrum sale will boost the company’s cash balance. However, it would leave the satellite company operating in a saturated market with no other major growth driver. Other pay-TV operators have alternative growth engines: Comcast and Time Warner Cable have broadband, while Dish’s satellite rival DirecTV has a significant presence in the Latin America pay-TV market. The U.S. pay-TV market is saturated, with pay-TV penetration currently at more than 95% of U.S. TV households. Given the saturation level and the slowdown in the housing market, we are unlikely to see a significant increase in the number of the U.S. pay-TV subscribers. The pay-TV industry is seeing fierce competition between cable, satellite and telcos. Additionally, alternative video platforms such as Netflix are adding to the woes. Dish was able to add only 1,000 net pay-TV subscribers during 2013, compared to the addition of approximately 89,000 video subscribers during the prior year. In this competitive environment, Dish sees the bundling potential as a growth opportunity and it could go on to build the planned wireless network.

While the U.S. wireless market is also highly saturated, demand for services (mostly data services) continues to increase and consumers are willing to pay for mobile connectivity. That said, the company still has a long way to go before it can truly reap benefits from its spectrum. It should be noted that Dish must connect 40% of its spectrum by 2017, according to the agreement with the FCC. If Dish fails to make use of its spectrum in time, it will go back to the FCC. Acquiring an existing carrier would give Dish a ready-to-use infrastructure for its spectrum and in a short period of time. Last year, Dish made an unsuccessful attempt to acquire Sprint. It might now try to acquire T-Mobile U.S. given the limited time in hand. We believe that Dish will be better off making use of the spectrum either by acquiring or partnering with an existing carrier, or building its own network rather than selling an asset of immense future value to Verizon or any other telecom operator.

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